Hong Kong Stocks Fall Most in Two Months on Europe Debt Concern

Hong Kong’s Hang Seng Index (HSI) declined the most in more than two months on concern Europe’s debt crisis will worsen after Fitch Ratings cut Greece’s credit rating three levels, and as manufacturing slowed in China.

Esprit Holdings Ltd. (330), which got 83 percent of its fiscal 2010 revenue from Europe, fell 4 percent. Li & Fung Ltd. (494), the biggest supplier to retailers including Wal-Mart Stores Inc., slumped 4.6 percent after Gap Inc. cut its profit forecast. Foxconn International Holdings Ltd. (2038), the handset manufacturing unit of the world’s No. 1 contract electronics maker, sank 2.9 percent after reporting an explosion at a factory in China.

The Hang Seng Index slid 2.1 percent to 22,711.02 as of the close of trading, its steepest drop since March 15. All stocks in the 45-member gauge declined.

“Investors have been concerned about the lack of agreement on how to deal with the funding of the Greek debt,” said Khiem Do, Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management Ltd. “It’s still difficult to predict where it will end up. The world economy has entered a mid-term economic slowdown. At the moment, the market is trading toward the bottom of the trading range.”

The Hang Seng China Enterprises Index of Chinese companies’ H shares retreated 2.5 percent to 12,624.16. China’s preliminary manufacturing index, known as the Flash PMI, was at 51.1, compared with the final reading of 51.8 in April, HSBC Holdings Plc (5) and Markit Economics said today. The reading was the lowest in 10 months, HSBC said. A number above 50 indicates expansion.

Esprit dropped 4 percent to HK$29.15, the lowest level in seven years. HSBC Holdings Plc (HSBA), Europe’s No. 1 bank by market value, lost 1.9 percent to HK$79.45, the biggest drag on the Hang Seng Index. Cosco Pacific Ltd. (1199), which operates container facilities at Piraeus port, Greece’s largest, fell 3.4 percent to HK$15.30.

Rating Cut

Fitch Ratings cut Greece’s credit rating three levels to B+, four steps below investment grade, from BB+. Fitch said even a “soft” restructuring of debt being studied by European Union policy makers would be considered a default. Fitch said Greece could face a further reduction in its creditworthiness.

Italy had its credit-rating outlook lowered to negative from stable on May 21 by Standard & Poor’s, which cited the nation’s slowing economic growth and “diminished” prospects for a reduction of government debt. The nation’s Treasury said it will “intensify” structural changes in the economy and push ahead with measures to balance the budget by 2014.

In Spain, Prime Minister Jose Luis Rodriguez Zapatero led his Socialist party to its worst defeat in more than 30 years in local elections, prompting a transfer of power in Spain’s region that risks reviving concerns over the country’s public finances. The opposition People’s Party won 38 percent of the vote in municipal elections yesterday, the Interior Ministry said.

Biggest Drop

Futures on the Standard & Poor’s 500 Index slid 0.8 percent today. In New York, the index lost 0.8 percent on May 20.

Li & Fung slumped 4.6 percent to HK$17.86, the steepest drop in the Hang Seng Index, after Gap, the largest U.S. apparel chain, cut its full-year profit forecast by 22 percent as costs to make clothes rose faster than expected. Bossini International Holdings Ltd., a retailer of casual clothing in Asia, sank 2.3 percent to 84 Hong Kong cents.

The Hang Seng Index fell 0.3 percent last week on concern U.S. and Greece debt will worsen. Shares in the gauge traded at an average 12.2 times forecast earnings on May 20, compared with 14.4 times at the end of last year, according to data compiled by Bloomberg.

Foxconn slid 2.9 percent to HK$4.08 after its parent Foxconn Technology Group said three people were killed and 15 injured in a blast on May 20 at its plant in southwest China’s Sichuan province.

Banks Decline

Chinese banks declined after Fan Wenzhong, director-general of the China Banking Regulatory Commission, said on May 21 the nation’s banking system requires further strengthening of its risk management.

Industrial & Commercial Bank of China (1398) Ltd., the nation’s biggest lender, sank 2.7 percent to HK$6.23. China Construction Bank Corp., the No. 2 lender by market value, dropped 2.1 percent to HK$7.08.

Futures on the Hang Seng Index fell 2.2 percent to 22,633. The HSI Volatility Index, the benchmark gauge for Hong Kong stock options, jumped 13 percent to 19.30, indicating options traders expect a swing of 5.5 percent in the Hang Seng Index in the next 30 days.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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